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Monetary transmission and equity markets in the EU

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  • Elbourne, Adam
  • Salomons, Roelof

    (Groningen University)

Abstract

We assess the role of equity markets in the transmission of monetary policy in the EU. We use a structural VAR model based upon the models of Kim and Roubini [2000] and Brischetto and Voss [1999] and we find that there are differences in monetary policy transmission across our sample of countries. The largest output losses following a monetary shock are seen in a core of euro area countries: Austria, Belgium, Finland, France, and Germany. Germany also displays the largest response of prices and is followed by Austria and Finland. Variance decompositions also suggest that the bank based core euro area countries are different from market based countries. As regards the channels of transmission we find no evidence to suggest an equity wealth effect channel in the euro area and only circumstantial evidence for the UK. We do, however, find that those countries that use equity finance (the UK and the Netherlands) suffer smaller output losses following a monetary shock indicating that a bank lending channel is less likely to be present in these countries.

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Bibliographic Info

Paper provided by University of Groningen, Research Institute SOM (Systems, Organisations and Management) in its series Research Report with number 04E15.

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Date of creation: 2004
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Handle: RePEc:dgr:rugsom:04e15

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  1. Hylleberg, S. & Engle, R. F. & Granger, C. W. J. & Yoo, B. S., 1990. "Seasonal integration and cointegration," Journal of Econometrics, Elsevier, vol. 44(1-2), pages 215-238.
  2. Frederic S. Mishkin, 2001. "The Transmission Mechanism and the Role of Asset Prices in Monetary Policy," NBER Working Papers 8617, National Bureau of Economic Research, Inc.
  3. Mojon, BenoƮt & Kashyap, Anil K. & Angeloni, Ignazio & Terlizzese, Daniele, 2002. "Monetary Transmission in the Euro Area : Where Do We Stand?," Working Paper Series 0114, European Central Bank.
  4. Peersman, Gert & Smets, Frank, 2002. "The industry effects of monetary policy in the euro area," Working Paper Series 0165, European Central Bank.
  5. Kwiatkowski, Denis & Phillips, Peter C. B. & Schmidt, Peter & Shin, Yongcheol, 1992. "Testing the null hypothesis of stationarity against the alternative of a unit root : How sure are we that economic time series have a unit root?," Journal of Econometrics, Elsevier, vol. 54(1-3), pages 159-178.
  6. Andrea Brischetto & Graham Voss, 1999. "A Structural Vector Autoregression Model of Monetary Policy in Australia," RBA Research Discussion Papers rdp1999-11, Reserve Bank of Australia.
  7. Benedict J. Clements & Zenon Kontolemis G. & Joaquim Vieira Ferreira Levy, 2001. "Monetary Policy Under EMU: Differences in the Transition Mechanism?," IMF Working Papers 01/102, International Monetary Fund.
  8. van Els, Peter J. A. & Locarno, Alberto & Morgan, Julian & Villetelle, Jean-Pierre, 2001. "Monetary policy transmission in the euro area: What do aggregate and national structural models tell us?," Working Paper Series 0094, European Central Bank.
  9. Sydney Ludvigson & Charles Steindel, 1998. "How important is the stock market effect on consumption?," Research Paper 9821, Federal Reserve Bank of New York.
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Cited by:
  1. Elmer Sterken, 2004. "The Role of the IFO Business Climate Indicator and Asset Prices in German Monetary Policy," CESifo Working Paper Series 1204, CESifo Group Munich.
  2. Elbourne, Adam & de Haan, Jakob, 2006. "Financial structure and monetary policy transmission in transition countries," Journal of Comparative Economics, Elsevier, vol. 34(1), pages 1-23, March.
  3. Radoslaw Kurach, 2011. "Eurozone stock returns co-movement: Some findings for portfolio managers and central bankers," Business and Economic Horizons (BEH), Prague Development Center, vol. 5(2), pages 1-12, April.

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